LONDON MARKET; Retailers flounder as competition heats up

RETAILERS such as J Sainsbury and Safeway may decline this week on the expectation that competition and the internet have squeezed prices and cut profits.

Engineering company Invensys and home builder Berkeley may advance amid optimism that Britain's economic growth will bolster earnings.

Sainsbury's, the UK's second-largest retail chain, is expected to say on Tuesday that first-half earnings per share fell 30 per cent while rival Safeway could report an 18 per cent drop in earnings. "It's extremely competitive in the high street," said Robert Talbut, head of global equities at Royal & Sun Alliance. "The earnings figures are not going to look very clever and the outlook statements will be extremely cautious. It's not a very interesting sector for us to invest in."

Mr Talbut said both food and clothing retailers are suffering from "huge excess capacity" in shop space, price sensitivity among consumers, and the effect of the internet, which is undermining traditional pricing strategies. Somerfield, Tesco and Iceland may slip. Marks & Spencer, Great Universal Stores and Boots may also drop. Arcadia, the UK's second-largest clothing retailer, warned on Thursday that first-half profit may fall short of expectations. Storehouse said it will split in two after discounting and sliding sales brought a first-half loss. These reports prompted Credit Suisse First Boston and HSBC analysts to downgrade their profit estimates for all leading clothing retailers.

"The UK clothing market is suffering an unprecedented level of price deflation, combined with a very demanding consumer," said HSBC. "Recovery is not coming through, and forecasts can't be believed."

UK third-quarter GDP, to be released on Tuesday, is expected to rise 1.9 per cent year on year, up from a 1.4 per cent gain in the second quarter. The outlook for accelerating growth may boost construction and manufacturing.

The FT-SE 100 index fell 0.5 per cent last week. Vodafone AirTouch led declines after its 133bn euro offer for Mannesmann, raising concern the company may be paying too much and diluting its earnings.